The global body for professional accountants
Investments - Alternative
accounting Options for
Managing a substantial
Balance Sheet Item
The global body for professional accountants
Accounting for Investments
A credit union may invest any of its funds:
• in securities in which trustees are authorised by law to
invest
• shares deposits or loans to another credit union
• shares of Industrial and Provident Societies
• other investments as may be prescribed by the central
Bank
• Other funds on current account with a credit institution
• Other non-permitted investments to be disposed of
within 2 years
The global body for professional accountants
Accounting for Investments
Investment prescribed by Central Bank:
• Irish and EMU State Securities
• Accounts in Authorised Credit
Institutions (Irish and Non-Irish
based).
• Bank Bonds
• Investment in Equities
• Collective Investment Schemes
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Realised profits
The Credit Union Act
“…only surpluses realised at the
balance sheet date shall be included in
the income and expenditure account…”
“all income and charges … shall be
taken into account without regard to the
date of receipt of payment..”
The global body for professional accountants
Realised profits
The Guidance
Realised means received in:
1. Cash
2. An asset that is readily convertible
to cash (traded in an active market)
3. accrual of investment income in 2
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Realised profits – Practical examples
•
•
•
•
•
•
•
•
•
Short term deposits – all realised
Long term deposits – encashment value – realised
Long term deposits – nominal value - unrealised
Government bonds - realised (active market)
Bank bonds - active market - realised
Bank bonds – in-active market - not realised
Bank bonds – encashment value – realised
Equities – realised
Collective Investment Schemes - encashment value –
realised
• Collective Investment Schemes - nominal value – not
realised
The global body for professional accountants
Spanish Government Bonds – Extract from investor analysis
“At a current price of c. 100.45, the bond yields c. 2.95% and
matures in January 2016.
•As a comparison, three year Irish Government bonds yield c. 2.10%
and a three year deposit with AIB will pay c. 2.05%.
•This bond pays a coupon of 3.15% annually which can be
distributed.
This will diversify counterparty exposure to sovereign risk and
reduce the pressure on domestic bank counterparty exposures Over
the life of the investment investing in this Spanish Government
bond will generate additional income versus a similar 3 year deposit
with AIB yielding 2.05% of c. €13.6k”
The global body for professional accountants
Accounting for Investments 1/5
Irish and EMU State Securities - criteria
• Maturity not more than 10 years
• 30% max in 7+ year bonds
• Not more than 70% of CU portfolio
Amortised Cost
• Yield = profit
• Capital gains and losses
booked
Fair value
• Yield = profit
• Capital gains and losses
booked
Held to maturity
• Yield = profit
Capital gains and losses
ignored
Check for impairment
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Accounting for Investments
Irish and EMU State Securities - amortised accounting
cost model
Issued €0.95
Redeemed €1
Yield = coupon + (1-0.95)/6 periods
The global body for professional accountants
Accounting for Investments
Irish and EMU State Securities - amortised accounting
cost model
Issued €0.95
Credit downgrade
Redeemed €1
Held to maturity: ignore downgrade (but consider impairment)
Cost and fair value: book downgrade – increased yield in future
years
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Accounting for Investments
Irish and EMU State Securities - purchase at a premium
• Nominal value €1.0m
• Coupon 5.5%
• Yield 2.556% (monthly yield)
• Cost to purchase (@111.6) €1,111,600
• Redeemed in 2017 for €1m
The global body for professional accountants
Accounting for Investments
Irish and EMU State Securities - purchase at a premium
•
•
Nominal €1.0m, Coupon 5.5%, Yield 3.8% (simple)
Cost €1,111,600 Redeemed in 2017 for €1m
Opening
Yield
Coupon
Closing
year
1111
7.0*
55
1063
2013
1063
40.4
55
1048
2014
1048
39.8
55
1033
2015
1033
39.3
55
1018
2016
1018
38.7
55
1000
2017
*2 month to coupon date
The global body for professional accountants
Accounting for Investments
Irish and EMU State Securities
Redeemed €1
2014
Credit downgrade
2013
2016
Issued €1.11
2015
Held to maturity: ignore downgrade (but consider impairment)
Cost and fair value: book downgrade – increased yield in future
years
The global body for professional accountants
Accounting for Investments 2/5
Irish and EMU State Securities - purchase at a premium
Lets be really clear
• Purchase a €1m bond for €1.1m
• Investment is €1.1m (not €1m)
• There is not an expenses of €100k
• Coupon is a cash flow number and irrelevant to the
income statement
• Yield (to maturity) is the key number
The global body for professional accountants
Spanish Government Bonds – Extract from investor analysis
“At a current price of c. 100.45, the bond yields c. 2.95% and
matures in January 2016.
•As a comparison, three year Irish Government bonds yield c. 2.10%
and a three year deposit with AIB will pay c. 2.05%.
•This bond pays a coupon of 3.15% annually which can be
distributed.
This will diversify counterparty exposure to sovereign risk and
reduce the pressure on domestic bank counterparty exposures Over
the life of the investment investing in this Spanish Government
bond will generate additional income versus a similar 3 year deposit
with AIB yielding 2.05% of c. €13.6k”
The global body for professional accountants
Accounting for Investments 2/5
Accounts in Authorised Credit Institutions
• Maturity not more than 10 years
• 50% max in 5+ year deposits
• 20% max in 7+ year deposits
• Credit rating of A
• Not more than 25% of CU portfolio
The global body for professional accountants
Accounting for Investments
Accounts in Authorised Credit Institutions
Cost and fair value - short term
• Interest is income
Cost - long term deposits
• Interest less encashment
penalty as income
Fair value - long term deposits
• Interest = income + gains
and losses due to credit risk
changes
Held to maturity
• Interest is income
Early encashment penalty is
non distributable
Check for impairment
The global body for professional accountants
Accounting for Investments 3/5
Bank Bonds
• Traded on a regulated market
• Maturity not more than 10 years
• 30% max in 7+ year deposits
• Credit rating of A (institute not bond)
• Not more than 70% of CU portfolio
The global body for professional accountants
Accounting for Investments
Bank bonds – active market
Amortised Cost + Fair value
• Book yield as profit
• Capital gains and losses
booked
Held to maturity
• Book yield as profit
Capital gains and losses
ignored
Check for impairment
Must have an “active market” for gains to be realised
The global body for professional accountants
Accounting for Investments
Bank bonds – inactive market
Amortised Cost
• Encashment value in
excess of cost = income
Fair value
• Yield + capital gains and
losses = income
• Only encashment excess is
distributable
Held to maturity
• Book yield as profit
• Encashment value in
excess of cost = realised
income, balance =
unrealised
• Check for impairment
The global body for professional accountants
Accounting for Investments 4/5
Investment in equities
• Euro denominated, traded on regulated EU market
• Market capitalisation of €.5bln
• Not more than 5% of CU portfolio (total)
• Not more than 1% of CU portfolio (any one share)
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Accounting for Investments 4/5
Investment in equities
Cost and fair value
Dividend and gains + losses
as profit (gains not
distributable)
Held to maturity n/a
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Accounting for Investments 5/5
Collective Investment Schemes
• No property schemes
• Financial Regulator Authorised schemes only
• Underlying investments meet requirements in 1-4
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Accounting for Investments 5/5
Collective Investment Schemes
Amortised Cost
• Encashment value in
excess of cost = income
Fair value
• Yield + capital gains and
losses = income
• Only encashment excess is
distributable
Held to maturity
• Book yield as profit
• Encashment value in
excess of cost = realised
income, balance =
unrealised
• Check for impairment
The global body for professional accountants
Investments - key questions
• Is it on the list of authorised investments for credit
unions
• Is there a deep and liquid market for the product
• Credit rating of the issuer
• Credit rating of the bond
• Will this product be accounted for as a simple financial
instrument under Chapter 11 of FRS 102
• Or Will this product be accounted for as an other
financial instrument under Chapter 12 of FRS 102
The global body for professional accountants
Investments - myths debunked
• Spanish Government bonds are allowed
• (2.9% yield but be careful of volatility and default)
• Junk/subordinated bonds from an A credit rated bank
are allowed
• (10% yield but good chance of default)
• When referring to investment products, the word
“guaranteed” is an single word oxymoron
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CONTACT
aidan.clifford@accaglobal.com
01 4988907
www.accaglobal.com
The global body for professional accountants
The global body for professional accountants